Wednesday

6th Jul 2022

EU reaches deal to define 'sustainable' investment

The Finish EU presidency, European Commission and the European Parliament on Monday evening (16 December) all agreed on the common classification system for environmentally-sustainable investments - after disputes on whether gas and nuclear can be considered "green".

"With this deal, we now have a common language and new rules for financial markets," said Pascal Canfin, a French MEP who chairs the European Parliament's environment committee.

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The agreement is the first step to set a framework for sustainable finance, that will help investors and consumers to identify economic activities that can unambiguously be considered environmentally green.

The taxonomy also aims to end greenwashing and oblige corporates to disclose environmental, social and governance (ESG) factors and risks.

"This [classification] will [assist] financing an economy that is truly aligned with the Paris Agreement, but also enables to increase the transparency of financial markets," Canfin added.

The commission is expected to draft technicalities of the different categories "low-carbon", "transition" or "enabling" activities by the end of 2020, although the full set of labels will be developed by a Technical Expert Group on Sustainable Finance.

According to the commissioner for the EU's economy, Valdis Dombrovskis, this taxonomy is "the much-needed enabler to get green investments to flow and help Europe reach climate neutrality by 2050".

The working process of this new legislation sped up in October and November when Dombrovskis called it the "most important legislative piece" to achieve EU's climate goals.

The European Banking Authority (EBA) also welcomed the deal as "a major step" for sustainable financing.

"Greening the financial sector is a first step to make investment flow in the right direction, so it serves the transition to a carbon-neutral economy," said Finish MEP Sirpa Pietikäinen from the European People's Party (EPP).

Gas and nuclear disagreement

The previous version of the taxonomy was blocked last week by nine countries (France, UK, Czech Republic, Poland, Hungary, Slovakia, Bulgaria, Romania and Slovenia), fearing a negative impact on investment in nuclear and gas projects.

"Gas and nuclear can under no circumstances be included in the category of so-called "pure green" investments, but they are neither included nor excluded in principle from the other categories," said Canfin.

These energy forms, like all technologies covered by the taxonomy, will be subject to the "do not significant harm" (DNSH) principle - while contributing to one environmental objective, the activity must not significantly harm any of the other goals.

The amendment that managed to convince member states on Monday, before MEPs agreed on the proposal, slightly weaken the wording of the DNSH principle.

However, according to Sébastien Godinot, economist at NGO Worldwide Fund for Nature (WWF), "the final result is a robust and balanced deal ensuring that the taxonomy will be built on climate and environmental science – a must for this critical part of the EU sustainable finance agenda".

According to Bas Eickhout, vice-president of the Greens/EFA political group, "financial products will need to prove their sustainability under strict EU criteria" and this will encourage the markets to make sustainable investments the mainstream.

"The financial sector must play its role in the green transition and taxonomy will help push them towards sustainable investments," he added.

Next steps

The final confirmation will be done by EU ambassadors on Wednesday and by a plenary vote that will probably take place in January 2020.

However, it is assumed that these two final steps will not reopen discussions on the file in terms of its content.

The agreement reached must also be approved first by the two parliament's committees involved - environment and economic affairs committee.

The commission will regularly update the "technical screening criteria" based on scientific evidence.

However, the commission will have to develop a specific taxonomy of economic activities that significantly harm the environment by the end of 2021.

The taxonomy should be established by the end of 2021 to ensure its full application by the end of 2022.

However, a coalition of more than 30 civil society organisations believe that "given the urgency of the climate crisis, the law should ensure that the climate taxonomy enters into force before the end of 2020".

"We cannot afford to delay such action as investments are badly needed," they wrote in a letter to EU top negotiators.

COP25 ends with no deal on carbon markets

The outcome of the UN climate conference in Madrid (COP25) has been described as a "catastrophe" by environmental groups, since countries failed to agree on article six of the Paris Agreement, referring to the carbon markets system.

Experts threaten to quit over new EU 'green finance' rules

Nine members of the expert group advising the European Commission on sustainable finance rules say criteria for gas, forestry and bioenergy are "a clear contradiction to climate science" - threatening to step down if lobbying and politics prevail over science.

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